We can’t speak on how startups fail, if we’re unable to define what exactly they are. Defining a startup is too general, with startup communities denouncing what some businesses truly are. For example, a new restaurant has recently opened and is going through the early development phases. Just a quick google definition will tell you that a “newly established business,” is considered a startup. However, others will tell you it isn’t.
Let’s break down the characteristics of a startup
- Innovative: They provide something new, and do this by testing a hypothesis
- Growth: There’s room for them to grow, non-linearly
Before we go over the failure rates of startups, we have to be a bit more specific. Are we looking at:
- Are we looking at the failure rates of new businesses (in a general sense)?
- Are we looking at failures of new innovating concepts?
Let’s assume you’ve started a new IT firm that develops software for clients. Despite the fact that you are a new company that uses some form of technology, you are technically not considered a startup:
- There is no real innovation, as your IT firm would still be providing a similar service to any other IT firm.
- Your growth is linear – meaning you are still getting paid per hour. You would need to employ new developers, leading to an increase in costs, equivalent to your revenue.
What is the Failure Rate for Most New Business?
If we were to take this from face value, within the first year alone, 20% startups fail. This isn’t me telling you to not start your own business. Rather that 20% do fail, and the for 80% will still prosper on. However, the situation becomes a little more complicated the further we go through the years. Though 20% of startups fail in the first year, this percentage increases over time.
- 1st year: 20% startup failure rate
- 2nd year: 30% startup failure rate
- 5th year: 50% startup failure rate
- 10th year: 70% startup failure rate
If you’re traying to something innovative, don’t believe that you’ll fail within the first year. Consistency is your greatest ally.
Understand that any and every startup, is technically an experiment. A real startup would be predicted to fail, as you’re testing what works and what doesn’t. Due to the nature of a startup,, the tried and tested formula of a startup means you’re evaluating your hypothesis , which could ultimately be wrong. The greater the riskier its innovation, the greater the risk of failure.
What are the Consequences for WHY Startups Fail?
Let’s consider this: If a startup fund has 100 companies within its portfolio, 90% of them would fall through. 10 out of the 100 would find some success, with 1 one of those organisations having potential to become a unicorn.
Startup investors are looking for that one organisation that can provide them the biggest return. Therefore, investors don’t care much for losing a substantial amount of their investments. As a founder, it’ll be a real challenge to obtain funding for VC’s if you are unable to show determination and sustainability.
If your project doesn’t suit the investment requirements of VCs, that doesn’t imply it’s not worth pursuing. Being a successful entrepreneur of a unique business is far superior than failing to launch a standard go big or go home startup.
What are Reasons Startups Fail?
Below, I have ranked the biggest reason for why startups fail:
1. Marketing Problem
Not having identified the right marketing tactics, has caused the biggest problems for many startups. The main issue that comkes out of this, is the problem of market fit. Research into whether there is a target market, before investing so much time into a project. Find an efficient way of identifying this issue and change course if needed
2. Team Problems
If no one within your team is on the same page, this can cause problems meeting the same end goal. Friction within a team, team members being unavailable or motivated will prevent long-term progress for the company.
3. Financial Problems
Despite the fact that more than half of the entrepreneurs questioned did not have a budget for their business and that 75% were self-funded, just 16% blame financial issues for their failure. This is due to the fact that testing and validating concepts does not necessitate a large sum of money (you need effort). Money is needed to expand an already proven concept; financial issues mostly affect later-stage firms.
4. Technology Problems
Most startups will have implemented some form of technology into their system (partly as all startups should be integrating tech into their work). It’s almost unavoidable not having technology in your process, and only speeds up tasks quicker. Unfortunately, heavy investment into technology puts a blunder on the financials, when it is not necessary. When starting up, your primary focus should be on the validating your market-fit, before the tech aspects comes in.
5. Operational Problems
This is usually only in the case for startups that have physical products to sell. Startups that work with software, are typically going to be specialised enough to avoid these issues.
6. Legality Problems
Depending on the industry you work in, legal factors are still a burden for many. If you operate in the food industry, these startups would need to comply to many regulations. Following these regulations can slow the startups progress. It can potentially get worse, if these businesses do not follow certain regulations, putting the startup at risk of shutting down.
What Industries Do Startups Fail the Most In?
Here is the order in which industries, startups are more likely to fail in:
- Transportation & Utilities
- Education & Health
- Finance, Insurance & Real Estate
The Information industry has the greatest failure rate, which may seem unexpected at first. The information business, on the other hand, has a low barrier to entry and contains a substantial number of actual high-risk startups, which may be driving increasing average failure rates. If you’re to begin a traditional model of a startup, then this would be something to consider. The Statistic Brain Research Institute, covers a the topic of businesses that fall off, after a couple years.
In the case of a more innovative startup, it is harder to track the failure rate based on different industries. Thanks to the statistics from the Startup Genome Report 2019, it divides these innovative concepts based on the early-stage funding they may receive. It then looks at whether the sector is growing, maturing declining.
Are These Startup Sub-sectors a Good Choice?
The aforementioned startup sub-sectors all have one similarity: they are some of the easiest to acquire funding for to get a project off the ground, but they can usually be some of the most difficult to build a self-sustaining firm in.
The hottest subsectors indicate the startup industry’s overall ideology. They represent the most difficult technological problems, the greatest possibility for success, but also the greatest risk of failure.
To put it another way, being a unicorn in the field of digital media or education technology is less likely, and obtaining sufficient finance may be more challenging. However, establishing a profitable, self-sustaining firm in certain disciplines may be more feasible.
Startups are unquestionably difficult thing to bet your life on, but with tremendous risk comes great reward. You could see a potential, not just in terms of financial rewards, but also in terms of advancements and innovation that might enhance people’s lives. If you’re sacred of failure? Don’t be! Every failure, only brings you closer to a greater success rate. Don’t allow the possibility of failure deter you! Dare to be different!
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Amit has 18 years of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising. Amit & 7startup assist startups in the pre due-diligence process and help connect them to our vast network of investors. Reach out to us today and see if we’re a fit!